The Relation Between Long-Term and Short-Term Interest Rates in the United States

THE MORE ACTIVE MONETARY POLICY that has been pursued in the United States in recent years has resulted not only in fluctuations in the general level of interest rates but also in sharp changes in the relation between long-term and short-term rates. The spread between long-term and short-term rates was greatly narrowed during the period of rising interest rates which extended from the second half of 1954 to late 1957. Whereas for many years the yield on long-term bonds had usually exceeded rates for treasury bills and commercial paper by a considerable margin, the spread between the average yield on high-grade corporate bonds (Moody’s Aaa) and the average rate for prime commercial paper (4–6 months) diminished to only 0.05 percentage point in 1956 and 0.08 percentage point in the first ten months of 1957. With several reductions in the Federal Reserve Banks’ discount rates in November 1957 and the early months of 1958, interest rates fell rapidly. As usual, the decrease was greater for short-term rates than for long-term rates, and by June 1958 the spread between the yields on corporate bonds and commercial paper widened to 1.03 percentage points. Thereafter interest rates rose. Yields on long-term bonds soon approached their 1957 highs, but commercial paper rates remained well below their 1957 level. In the first quarter of 1959, the spread was 0.83 percentage point. The differential between yields on long-term and short-term government securities showed similar but even wider fluctuations.

Abstract

THE MORE ACTIVE MONETARY POLICY that has been pursued in the United States in recent years has resulted not only in fluctuations in the general level of interest rates but also in sharp changes in the relation between long-term and short-term rates. The spread between long-term and short-term rates was greatly narrowed during the period of rising interest rates which extended from the second half of 1954 to late 1957. Whereas for many years the yield on long-term bonds had usually exceeded rates for treasury bills and commercial paper by a considerable margin, the spread between the average yield on high-grade corporate bonds (Moody’s Aaa) and the average rate for prime commercial paper (4–6 months) diminished to only 0.05 percentage point in 1956 and 0.08 percentage point in the first ten months of 1957. With several reductions in the Federal Reserve Banks’ discount rates in November 1957 and the early months of 1958, interest rates fell rapidly. As usual, the decrease was greater for short-term rates than for long-term rates, and by June 1958 the spread between the yields on corporate bonds and commercial paper widened to 1.03 percentage points. Thereafter interest rates rose. Yields on long-term bonds soon approached their 1957 highs, but commercial paper rates remained well below their 1957 level. In the first quarter of 1959, the spread was 0.83 percentage point. The differential between yields on long-term and short-term government securities showed similar but even wider fluctuations.

THE MORE ACTIVE MONETARY POLICY that has been pursued in the United States in recent years has resulted not only in fluctuations in the general level of interest rates but also in sharp changes in the relation between long-term and short-term rates. The spread between long-term and short-term rates was greatly narrowed during the period of rising interest rates which extended from the second half of 1954 to late 1957. Whereas for many years the yield on long-term bonds had usually exceeded rates for treasury bills and commercial paper by a considerable margin, the spread between the average yield on high-grade corporate bonds (Moody’s Aaa) and the average rate for prime commercial paper (4–6 months) diminished to only 0.05 percentage point in 1956 and 0.08 percentage point in the first ten months of 1957. With several reductions in the Federal Reserve Banks’ discount rates in November 1957 and the early months of 1958, interest rates fell rapidly. As usual, the decrease was greater for short-term rates than for long-term rates, and by June 1958 the spread between the yields on corporate bonds and commercial paper widened to 1.03 percentage points. Thereafter interest rates rose. Yields on long-term bonds soon approached their 1957 highs, but commercial paper rates remained well below their 1957 level. In the first quarter of 1959, the spread was 0.83 percentage point. The differential between yields on long-term and short-term government securities showed similar but even wider fluctuations.

During the period of almost 25 years prior to 1956–57, a substantial excess of long-term interest rates over short-term rates had come to be regarded as normal by many persons. One explanation advanced for the differential is that long-term lenders have to be offered a premium to protect them against the risk that interest rates will rise in the future, thereby causing holders of long-term securities to suffer capital losses and to miss opportunities for higher yields. Coupling this view of the usual relationship between long-term and short-term rates with the widely held theory that the long-term rate at any time reflects mainly an average of expected future short-term interest rates, J. R. Hicks concluded: “If short rates are not expected to change, the long rate will exceed the short rate by a normal risk-premium; if the current short rate is regarded as abnormally low, the long rate will be decidedly above it; the short rate can only exceed the long rate if the current short rate is regarded as abnormally high.”1 On this basis, the narrowing of the differential between long-term and short-term rates in 1956–57 might be interpreted as an indication that the market considered the high short-term rates of those years temporary. By similar reasoning, the continuance of a considerable spread when rates rose in late 1958 and early 1959 might be taken as evidence that lenders were becoming accustomed to higher interest rates and were beginning to expect them to continue.

In a longer historical perspective, however, a spread between long-term and short-term interest rates as narrow as that of 1956–57 is by no means unusual. Prior to 1930, short-term interest rates were often equal to, or higher than, long-term rates. Short-term rates fluctuated over the business cycle much more than long-term rates, usually rising above long-term rates in boom periods and falling below long-term rates at the trough of the business cycle. The difference between the periods before and after 1930 suggests the possibility that the persistent excess of long-term rates in the later period was attributable to special factors, such as the great depression, war finance, and easy money policies, and that, if more flexible monetary policies are followed in the future, the behavior of the term structure of interest rates may resemble more closely that of the period before 1930 than that of the last 25 years.

In this paper, no attempt will be made to test various hypotheses with respect to the normal relation between long-term and short-term interest rates or to account for the apparent change in that relation after about 1930. The paper is confined to a review of statistics of long-term and short-term interest rates in the United States for the past century. Some general observations on the relationship between long-term and short-term rates are presented in Section I; the cyclical variability of the relationship is examined in more detail in Section II; and the Appendix contains information on data and methods for measuring cyclical variations in interest rates.

I. General Observations on the Relationship

In comparing long-term and short-term interest rates, it is desirable to use rates on obligations that are actively traded in open financial markets and that are subject to a minimum risk of default. It is also desirable that the rates be free from the influence of extraneous features, such as tax exemption, convertibility provisions, call provisions, and special rediscount facilities.

For a record of interest rates in the United States for a long period of time, it is necessary to use statistics of yields on private bonds and other debt instruments rather than on government securities. State and local bonds have been tax exempt, and federal securities were partially or wholly tax exempt until 1941. U.S. Treasury bonds, moreover, have had note issue and special discount privileges at various times, which may have affected their yields. In any case, satisfactory statistics of yields to maturity on federal bonds and short-term securities are not available for the years before 1920. Although private securities are subject to a somewhat greater risk of default than government securities and hence may be expected to have higher yields, this element can be minimized by selecting quotations for the highest grade bonds and other types of paper.

Long-term bond yields and commercial paper rates

The changing nature of the relationship between long-term and short-term interest rates is brought out by Chart 1, covering the years 1866–1958. Long-term rates are represented by Macaulay’s (unadjusted) series on yields on high-grade railroad bonds, 1866–1930,2 and by Moody’s composite series for Aaa bonds, 1931–58. The short-term rates are open market rates for 4–6 month prime commercial paper in New York City.3

Chart 1.

Annual Averages of Long-Term and Short-Term Interest Rates in the United States, 1866–19581

(In per cent per annum)

A04ct01
1 Reproduced, with permission of Board of Governors of Federal Reserve System, from Federal Reserve Chart Book on Financial and Business Statistics, Historical Supplement, September 1959, p. 37.* National Bureau of Economic Research.

Before 1930, the annual average rates on prime commercial paper exceeded railroad bond yields more often than not. The late 1870’s and the middle 1920’s are the only periods in which commercial paper rates were lower than long-term bond yields for several consecutive years. The tendency for short-term rates to exceed long-term rates is especially noticeable in the period of almost three decades from the middle of the 1880’s to the outbreak of World War I and the beginning of operations of the Federal Reserve Banks (November 1914). The fact that commercial paper was rediscountable at the Federal Reserve Banks after 1914 increased its liquidity and may have tended to lower commercial paper rates relative to bond yields in that period.4

Since 1929, commercial paper rates have always been lower than high-grade bond yields (annual averages), and by a wide margin until recent years. Commercial paper rates and other short-term rates fell, with only minor interruptions, throughout the 1930’s; high-grade bond yields dipped in 1930, rose somewhat in 1931–32, and declined thereafter. The fall in prime commercial paper rates from 1929 to 1939, however, was three times the decline in the average yields of Moody’s Aaa corporate bonds (5.26 percentage points compared with 1.72 percentage points). The decline in short-term rates was no doubt associated with the increasing liquidity of the commercial banks, attributable mainly to Federal Reserve open market operations in 1930–33 and to a large inflow of gold in 1934–39.5

In the 1940’s, the level and pattern of interest rates were dominated largely by the wartime and early postwar activities of the Treasury and the Federal Reserve authorities. A wide spread between long-term and short-term rates was preserved during the war. This spread narrowed considerably after the war, even during the period of active Federal Reserve intervention, which ended with the Treasury-Federal Reserve “accord” of 1951.6 In the 1956–57 period of tight money, the spread almost disappeared.

Although the annual averages smooth out some of the fluctuations, it is clear from Chart 1 that commercial paper rates, and to a lesser extent long-term bond yields, have shown a high degree of variability in certain periods. This variability will be examined in more detail in Section II.

Bond yields by term to maturity

Another set of data covering a fairly long period of time is Durand’s series on “basic yields” on corporate bonds classified by term to maturity, 1900–57.7 Basic yields are defined as “the yield of highest grade [corporate] bonds free from extraneous influences, bonds that are non-convertible, non-callable, fully taxable, actively traded, free from manipulation, etc.”8 A useful feature of this series is the detailed classification of issues by term to maturity, which permits Durand to draw yield curves covering a range of maturities from less than 1 year to 60 years or more. Two limitations of the data may be noted: (1) the yield figures are less reliable for bonds close to maturity, especially those within 1 year or less of maturity, than for bonds with more distant maturities;9 and (2) the determination of the freehand yield curves is to some extent a matter of judgment on which opinions may differ. Durand’s smooth curves, moreover, do not allow for possible humps or dips which should occur if middle-term yields lie outside the range of short-term and long-term yields.

Durand’s series and yield curves indicate that prior to 1930 it was by no means unusual for short-term and medium-term interest rates to be higher than long-term rates. In fact, for only 2 of the first 30 years of the century (1916 and 1925) does Durand’s yield curve have a generally ascending slope, i.e., indicate that yields rose with the term to maturity.10 For half the years the curve is descending, indicating that yields tended to be lower for long and medium terms to maturity than for short terms. For a number of years the curve is flat, and for some years its slope is uncertain although apparently flat over the greater part of its range. From 1930 through 1957 the yield curve is clearly ascending in 24 years; it is flat in 1 year and uncertain, but apparently flat over a considerable range, in 3 years. There is no year in this period for which the curve indicates higher yields for short maturities than for long maturities.

The characteristics of Durand’s yield curves may be summarized as follows:

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Yield curves for U.S. Treasury securities are published monthly in the Treasury Bulletin. For the period from the end of World War II to 1956, the yield curves maintain a generally ascending form, with varying degrees of slope and often a tendency to flatten out for longer maturities. In 1956, there was a pronounced tendency for the yield curves to be flat for most maturities, but to rise for maturities of up to about 2 or 3 years. In 1957, when interest rates were higher than they had been for many years, there were indications of a “hump” in the yield curve for a maturity of about 1 to 2 years, with the curve ascending sharply for shorter maturities and descending gently for longer maturities. With the decline in interest rates in late 1957 and early 1958, the yield curve had by mid-1958 resumed an ascending form for maturities up to 20 years.

II. Cyclical Variability of the Relationship

Up to the early 1930’s the relationship between long-term and short-term interest rates in the United States appears to have been highly sensitive to the general business cycle. Short-term rates were usually low relative to long-term rates at the trough of the business cycle and high relative to long-term rates at the peak of the cycle. This tendency is not evident for the late 1930’s or the war and immediate postwar period, but it seems to have been resumed more recently. The following discussion examines separately the evidence for the periods 1858–1933 and 1933–58.

Period 1858–1933

Until the 1930’s, short-term interest rates showed a strong tendency to move in the same direction as general business activity, usually being substantially lower at the trough of the business cycle than at the peak. Long-term interest rates displayed much less cyclical sensitivity; they varied less than short-term rates over the cycle, and their cyclical rise typically began at a later stage of expansion and continued well past the peak of the business cycle.13

In Chart 2, the cyclical pattern, 1858–1933, is summarized by curves showing commercial paper rates, call money rates at the New York Stock Exchange, and yields of high-grade long-term bonds during each stage of 19 business cycles as identified by the National Bureau of Economic Research.14 On the average, over these 19 cycles the rise and fall of commercial paper rates and call money rates corresponded to the expansion and contraction of general business activity, and both series of short-term rates reached their maximum at the peak of the business cycle. The rise of commercial paper rates, however, began at a later stage than that of call money rates; and after the cyclical peak, commercial paper declined much less abruptly. On the average, short-term rates were higher than long-term bond yields in the last stage of expansion and the first stage of contraction as well as at the peak of business activity. The chart shows clearly the lag of changes in bond yields behind movements in general business activity and in short-term interest rates. The average bond yield was slightly lower at the peak of the business cycle than during the initial and terminal troughs.15

Chart 2.

Average Cyclical Pattern of Long-Term and Short-Term Interest Rates in the United States, 1858–19331

(In per cent per annum; logarithmic vertical scale)

A04ct02
1 Weighted average of monthly rates for each step of 19 business cycles during the period; see Appendix, Table 1. The average monthly rate or yield during each of the 9 reference cycle stages is plotted at the midpoint of the cycle stage. The horizontal axis represents the duration, in months, of the cycle stages.

The averaging of interest rates over the stages of 19 business cycles conceals wide differences in the range of variability as well as irregularities in the timing of movements in individual cycles. Such differences can be seen from the statistics for individual cycles presented in Table 2 in the Appendix. The peaks of call money rates and commercial paper rates shown in Chart 2 are influenced significantly by the unusually high short-term interest rates at the peak of the 1870–79 cycle, which included the panic of 1873.16 If this cycle were omitted from the derivation of the average cyclical pattern, the peaks of the two short-term rate series would be lower but the same general pattern would exist.

The movement of short-term rates was greater and appears to have conformed somewhat more closely to the business cycle in the period before the beginning of operations of the Federal Reserve System than in later years (see the average patterns for 14 cycles, 1858–1915, and 5 cycles, 1914–33, Table 1 in the Appendix).

In all of the 19 cycles from 1858 to 1933, one or both of the short-term interest rates exceeded long-term bond yields at some stage, most often at or near the peak. On the other hand, there were only two cycles—1888–91 and 1919–21—in which commercial paper rates exceeded long-term bond yields at all stages, and in none of the cycles were call money rates higher than long-term bond yields throughout the cycle (Table 2 in the Appendix).

Period 1933–58

In the 1933–38 cycle, interest rates showed little cyclical sensitivity but tended to decline over the whole cycle. During World War II and the immediate postwar years, both the pattern of interest rates and general business cycle movements were dominated by special influences. More recently, there are indications that the earlier cyclical behavior of long-term and short-term rates may be reappearing, although short-term rates have generally remained below long-term rates.

The average pattern of rates for 4 business cycles, 1933–54, is shown in Chart 3. For that period, treasury bill rates rather than call money rates are taken as the second measure of short-term interest rates. The average pattern for these cycles shows that the short-term rates reached their peak at or near the peak of general business activity, but it also indicates a secondary peak in short-term rates at the trough of the business cycle. The average, however, is heavily influenced by the relatively high rates prevailing during the initial trough of the 1933–38 cycle. Long-term bond yields, on the average, do not show a clear cyclical pattern, but examination of the statistics for individual cycles, given in the Appendix, reveals that long-term rates conformed fairly well to the general pattern in the two postwar cycles, 1945–49 and 1949–54.

Chart 3.

Average Cyclical Pattern of Long-Term and Short-Term Interest Rates in the United States, 1933–541

(In per cent per annum; logarithmic vertical scale)

A04ct03
1 Weighted average of monthly rates for each stage of 4 business cycles during the period; see Appendix, Table 1. The average monthly rate or yield during each of the 9 reference cycle stages is plotted at the midpoint of the cycle stage. The horizontal axis represents the duration, in months, of the cycle stages.

The pattern of rates for the 1954–58 cycle, based on tentative datings of the peak (July 1957) and terminal trough (April 1958), is shown by Chart 4. Although the profile of interest rates over this cycle differs considerably from the average for the 19 cycles, 1858–1933, the cyclical character of the relationship between long-term and short-term rates is much more noticeable than in the 4 cycles, 1933–54.

Chart 4.

Pattern of Long-Term and Short-Term Interest Rates in the United States, 1954–581

(In per cent per annum; logarithmic vertical scale)

A04ct04
1 For data, see Appendix, Table 2. The average monthly rate or yield during each of the 9 reference cycle stages is plotted at the midpoint of the cycle stage. The horizontal axis represents the duration, in months, of the cycle stages.

APPENDIX: Data and Methods for Measuring Cyclical Variations in Long-Term and Short-Term Interest Rates, 1858–1958

Cycle Dates and Stages

The dates for the various phases of 24 business cycles in the United States for the period 1858–1958 are those of the “reference cycles” compiled by the National Bureau of Economic Research.17 The dating of the 1954–58 cycle is tentative. Each cycle is divided into nine phases or stages. Stages I, V, and IX are each of three months’ duration and represent, respectively, the initial trough, peak, and terminal trough of the reference cycle. The intervening period between the initial trough and the peak and the period between the peak and the terminal trough are each divided into three stages of nearly equal duration for an individual cycle. Stages II, III, and IV are the periods of expansion, and stages VI, VII, and VIII are periods of cyclical contraction. The terminal trough, stage IX, of each cycle covers the same three months as the initial trough of the next cycle. Furthermore, the first and third months of troughs and peaks are also included in the adjacent cycle stages.

Interest Rate Series

Short-term interest rates are represented by rates for call money, commercial paper, and treasury bills; long-term rates are represented by yields on high-grade corporate bonds.

Short-term rates

The call money rates are for renewal loans at the New York Stock Exchange. The commercial paper rates are open market rates in New York City for choice 60–90 day paper, 1858–1923, and for 4–6 month prime paper, 1924–58. The call money rates are from Macaulay;18 commercial paper rates are from Macaulay for the period 1858–1936 and from the Federal Reserve Board19 for 1937–58. Treasury bill rates are for new issues of 3-month bills.

Call money rates and commercial paper rates were subject to considerable seasonal influence, especially in the period before the establishment of the Federal Reserve System. The effect of this characteristic, however, is reduced by the averaging and weighting procedure employed in this paper. An advantage of call money rates for present purposes is that the qualities of call loans probably changed less over the period 1858–1933 than those of other short-term paper. Commercial paper became rediscountable at the Federal Reserve Banks with the establishment of the System. Prior to that time, bankers’ acceptances could not be held by national banks but were held by private, i.e., state-chartered, banks. Call loans and other paper for the purpose of financing speculative and investment transactions are not rediscountable at the Federal Reserve Banks. During most of the period under study in this paper, call money rates and commercial paper rates were probably the most important short-term rates in the open market. Treasury bills, which were first issued in 1929, became the most important type of short-term paper by the mid–1930’s; and in recent years their volume has greatly exceeded that of other short-term paper, as shown by the following tabulation.20 (In this tabulation, brokers’ loans, which are assumed to consist predominantly of call loans, are taken as representative of call money at the New York Stock Exchange.)

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Long-term rates

The long-term rates are Macaulay’s unadjusted series of yields on high-grade U.S. railroad bonds, 1858–1930,23 and yields of Moody’s Aaa (highest grade) corporate bonds, 1931–58.24 Macaulay’s study provides the only readily available information on bond yields in the earlier part of the period. During most of the years to 1930, railroad bonds were outstanding in greater volume and enjoyed a higher credit rating than other corporation bonds. Since Macaulay’s series ends with January 1937, it was necessary to use another series for the years 1937–58 at least. However, in view of the deterioration of the economic position of the railroad industry in the 1930’s, it was considered advisable to switch from the Macaulay series to Moody’s Aaa corporate bonds beginning with 1931.25

Macaulay’s series on railroad bond yields represents a chain index, expressed in terms of percentage yields, in which the groups of bonds comprising the index were modified in January of each year. With a few exceptions, the bonds had maturities of ten years or more. In some periods, especially in the early years, Macaulay’s chain-link procedure produces a yield figure that is considerably higher than the averages of actual yield quotations of the bonds included in the index. For example, the index for January 1860 is 8.92 per cent, whereas the actual average of yields of the bonds used for that month is only 7.48 per cent.

Macaulay’s study also includes a series on railroad bond yields adjusted for “economic drift.” The adjustment is intended to remove the effect of secular and cyclical changes in the quality of the bonds attributable to changes in the financial condition of the railway industry. Month-to-month movements of the adjusted data are almost identical with movements of the unadjusted data. The drift adjustment, however, does affect the absolute level of the yields. Over the whole period 1858–1937 for which the two series are available, the unadjusted series exceeds the adjusted series by an average differential of about 810 per cent. The adjustment is substantially larger than this in the earlier years and smaller in the later years, especially in the late 1920’s.26

For this paper, the unadjusted series was considered preferable for three reasons. First, no adjustment for economic drift is available for short-term rates, although the average quality of commercial paper tended to improve over the period covered. Second, it is not obvious that the smaller secular decline in long-term interest rates shown by the adjusted series gives a more accurate picture of the movement of representative interest rates in the light of capital supply and demand. Third, the nature and appropriateness of Macaulay’s adjustment are not entirely clear to us.

Derivation of Cyclical Patterns

In deriving the pattern of interest rates for each business cycle, monthly figures on call money rates (or treasury bill rates), commercial paper rates, and bond yields were averaged for each of the nine stages of the cycle. For the average cyclical patterns, the rate in each phase was weighted by the duration, in months, of the phase in order to avoid giving disproportionate weight to sharp fluctuations of brief duration.

Table 1.

Average Cyclical Patterns of Call Money Rates (or Treasury Bill Rates), Commercial Paper Rates, and Long-Term Bond Yields During Stages of NBER Reference Cycles, 1858–1954

(In per cent per annum)

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Sources: For a description of the sources and the reference cycles, see the text of this Appendix.

Call money rates for the first three cyclical patterns (1858–1933, 1858–1915, and 1914–33); treasury bill rates for the last cyclical pattern (1933–54). Call money rates are for renewal loans at the New York Stock Exchange; treasury bill rates are for new issues of 3-month bills.

Choice 60–90 day paper for 1858–1923; 4–6 month prime paper for 1924–54.

High-grade U.S. railroad bonds for 1858–1930; Moody’s Aaa corporate bonds for 1931–54.

The weighting used is described in the Appendix, final section, Derivation of Cyclical Patterns.

Table 2.

Averages of Call Money Rates (or Treasury Bill Rates), Commercial Paper Rates, and Long-Term Bond Yields During Stages of NBER Reference Cycles, 1858–1958

(In per cent per annum)

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Sources: For a description of the sources and the reference cycles, see the text of this Appendix.

The terminal trough of each cycle, stage IX, which is not shown separately except for cycle 24, covers the same three months as the initial trough, stage I, of the next cycle.

Choice 60–90 day paper for 1858–1923; 4–6 month prime paper for 1924–58.

High-grade U.S. railroad bonds for 1858–1930; Moody’s Aaa corporate bonds for 1931–58.

Renewal loans at the New York Stock Exchange.

The New York Stock Exchange was closed August-November 1914, and no quotations are available for that period.

New issues of 3-month bills.

Corresponding figure for call money: 1.90.

Cycle dates are tentative.

*

Mr. Goode, member of the staff of the Brookings Institution, was formerly Assistant Director of the Asian Department of the Fund. Before joining the Fund staff, he was assistant professor of economics at the University of Chicago and economist at the U.8. Bureau of the Budget and the U.S. Treasury Department.

Mr. Birnbaum, economist in the Finance Division, was educated at Ohio State University and George Washington University.

1

J. R. Hicks, Value and Capital (Oxford, 2nd ed., 1946), p. 147. Friedrich Lutz, who also considers the long rate a reflection of expected short rates, believes that yields will be approximately equal for different maturities if no change in short rates is expected. See Friedrich A. Lutz, “The Structure of Interest Rates,” The Quarterly Journal of Economics, Vol. LV (1940–41), pp. 36–63, reprinted in American Economic Association, Readings in the Theory of Income Distribution (1946), pp. 499–529.

2

Frederick R. Macaulay, The Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856 (National Bureau of Economic Research, New York, 1938), pp. A141–61.

3

Data for the earlier years are from Board of Governors of the Federal Reserve System, Banking and Monetary Statistics (Washington, November 1943); those for the more recent years are from Federal Reserve Bulletins.

4

Rediscounting occurred among commercial banks before the establishment of the Federal Reserve System but was likely to become expensive and difficult in times of monetary stringency.

5

Federal Reserve Banks’ holdings of U.S. Government securities increased from $0.5 billion at the end of 1929 to $2.4 billion at the end of 1933, but remained approximately stable in the years 1934–39 The gold stock, which was $4.0 billion at the end of 1929 and again at the end of 1933, rose to $17.6 billion by the end of 1939. See Banking and Monetary Statistics (cited above), pp. 375–77.

6

For details of the policies of the U.S. Treasury and the Federal Reserve Board with respect to interest rates from 1939 to 1951, see Henry C. Murphy, The National Debt in War and Transition (New York, Toronto, and London, 1950), and U.S. Congress, Joint Committee on the Economic Report, Monetary Policy and the Management of the Public Debt: Replies to Questions and Other Materials for the Use of the Subcommittee on General Credit Control and Debt Management (82nd Cong., 2nd Sess., Washington, 1952), Vol. 1, pp. 50–76 and 346–68.

7

David Durand, Basic Yields of Corporate Bonds, 1900–1942 (National Bureau of Economic Research, Technical Paper 3, New York, 1942); David Durand and Willis J. Winn, Basic Yields of Bonds, 1926–1947: Their Measurement and Pattern (National Bureau of Economic Research, Technical Paper 6, New York, 1947); National Industrial Conference Board, The Economic Almanac, 1958 (New York, 1958), p. 85.

8

David Durand, op. cit., p. 4.

9

Ibid., pp. 12–14.

10

Both 1916 and 1925 were years of cyclical expansion of general business activity.

11

All of these curves are flat for the longer maturities (generally maturities longer than about 5 or 6 years); their shape for the shorter maturities is uncertain, but there is some indication that the curves may be descending in this range.

12

For 1932, the curve is flat for maturities longer than about 8 years, and un-certain for shorter maturities but possibly ascending; for 1952 and 1957, it is flat up to 10 and 20 years, respectively, and ascending thereafter.

13

See Chart 2 and also Wesley C. Mitchell, What Happens During Business Cycles (National Bureau of Economic Research, New York, 1951), p. 167. Mitchell presents measures of the timing and amplitude of cyclical changes of open market rates for call money, commercial paper, and 90-day time money and of yields of railroad bonds, New England municipal bonds, and high-grade corporate and municipal bonds.

14

See Arthur F. Burns and Wesley C. Mitchell, Measuring Business Cycles (National Bureau of Economic Research, New York, 1946).

15

See Appendix for additional information.

16

At the cyclical peak in 1873, the average call money rate is computed to be 28.51 per cent and the average commercial paper rate 15.09 per cent. The average peaks for the other 18 cycles, 1858–1933, are only 5.89 per cent and 5.77 per cent, respectively. The average peaks for the 19 cycles are 7.08 per cent and 6.26 per cent, respectively.

17

Arthur F. Burns and Wesley C. Mitchell, op. cit., and a private communication from the National Bureau of Economic Research to the authors of this paper.

18

Frederick R. Macaulay, op. cit., pp. A141–61.

19

Banking and Monetary Statistics (cited above), p. 451, and Federal Reserve Bulletins.

20

Statistics for 1920–38 from Banking and Monetary Statistics (cited above), pp. 465–67, 494, and 509–10; statistics for 1950–58 from Federal Reserve Bulletins.

21

Including finance company paper.

22

Rounded to nearest $100 million.

23

Frederick R. Macaulay, op. cit., pp. A141–61.

24

Banking and Monetary Statistics (cited above), pp. 470–71, and Federal Reserve Bulletins.

25

The average of the Macaulay series is 4.41 per cent in 1930 and 4.65 per cent in 1931. The average of the Moody series is 4.55 per cent in 1930 and 4.58 per cent in 1931. After 1931, the Macaulay series tends to exceed the Moody series by a wider margin.

26

The average of monthly bond yield quotations for the unadjusted series in 1860 is 8.591 per cent, compared with 6.040 per cent for the adjusted series, i.e., a differential of 2.551 per cent. By 1930, the average differential amounted to only 0.517 per cent. Yields indicated in the unadjusted series at all times exceed corresponding figures of the adjusted series.